Hungary and Poland against Rule of law Conditionality Regulation: the AG’s Opinions

On 2 December 2021, the Advocate General (AG) Campos Sánchez-Bordona expressed his Opinions (here and here) on the requests of annulment brought by Poland and Hungary against the regime of conditionality for the protection of the Union budget in the event of breaches of the principles of the rule of law.

As scholars argued, EU is in the middle of its values crisis, especially triggered by the frontrunners Hungary and Poland. In the last decade, the two Member States took several attempts to undermine the correct functioning of the liberal State, especially targeting the independence of the judiciary. The late published EU Rule of law report thoroughly discussed the problems of judicial independence in Hungary, where Orbán has relentlessly tried to capture the Supreme Court and the Constitutional Court and to guarantee its political influence over the judges, especially through the latest 2018 administrative court reform. The ‘illiberal’ turn taken by Orbán has been followed by the Polish government, which has been recently involved in two infringement proceedings concerning its threats to both the independence of the judges, through the Polish judiciary reform, and the primacy and effectiveness of EU law.

The essentiality of this principle states in the fact that, as the other principles enshrined in Article 2 TEU, it is strictly connected to good functioning of all the other EU policies. Indeed, the rule of law is also an important precondition for, among the above mentioned ones, the sound financial management and effective EU funding.

For this reason, in 2018 the Commission proposed a Regulation on the protection of the EU budget in case of generalised deficiencies as regards the rule of law in the Member States. After intense political and legal wrangling for the better half of 2020, the Union agreed upon the new ‘Rule of Law Conditionality Regulation’.

Unsurprisingly, the Regulation was challenged by Hungary and Poland, which threatened their veto on the adoption of the Multiannual Financial Framework 2021-2027 and Next Generation EU, unless further clarifications over the concepts and sanctions criteria were made by the Commission. Originally crafted by the German Presidency in close contact with Budapest and Warsaw, a criticised compromise was agreed upon at the European Council meeting on 10 December 2020, which stated that the Commission would not have proposed measures under the Regulation, until guidelines had not been finalised. As to the establishment of these guidelines, the European Council agreed that should an action for annulment be introduced with regard to the Regulation, they would have been finalised after the judgment of the Court of Justice.

On 16 December 2020, the EU finally adopted the Regulation 2020/2092, which established the regime of conditionality for the protection of EU budget, linking it to cases of breaches of the principles of the rule of law in the Member States. The Regulation reports a clear definition of the aspects that concept of ‘rule of law’: it includes the principles of legality, according to which the legislative process must be transparent, accountable, democratic and pluralistic; legal certainty; prohibition of arbitrariness of the executive; effective judicial protection, including access to justice, by independent and impartial courts; separation of powers; non-discrimination and equality before the law.

Then, it refers to those circumstances where a violation of one of these principles risks to or compromises in a sufficiently direct way the sound financial management of the Union’s budget. Indeed, the Regulation lists different aspects of the financial management of the budget that can be endangered by breaches of rule of law principles: the proper functioning of the authorities implementing the Union budget and the ones carrying out financial control, monitoring and audit; the proper functioning of effective and transparent financial management and accountability systems and of investigation and public prosecution services in relation to the investigation and prosecution of fraud; the effective judicial review by independent courts of actions or omissions by the above mentioned authorities. Furthermore, the legislative act provides proper measures to be adopted in order to protect the Union budget. They can include the suspension of payments and of legal commitments or the reduction of pre-financing or commitments to the interested Member State. These measures involves the evaluation of the Commission and the final Council’s decision, which is passed through qualified majority voting. The Regulation is based on the powers of the Council and the Commission to establish and implement the budget according to Article 322 TFEU.

On 11 March 2021, both Hungary and Poland introduced their actions of annulment against the Regulation. Following the October hearings of the case, the Advocate General expressed his Opinions on the issues raised by the two Member States. Both the applicants’ arguments (C-156/21 and C-157/21) and the AG’s analysis centred around three principal concepts: the unsuitability of Article 322 TFEU as a proper legal basis; the Regulation is incompatible with Article 7 TEU and Article 269 TFEU as well as with the principle of legal certainty.

Firstly, Hungary and Poland put in question the suitability of Article 322 TFEU as a legal basis for the Regulation. Indeed, according to the legal disposition, the Union legislator shall adopt financial rules relating to the implementation of the Union budget; however, they argued that the present Regulation does not contain such financial or budgetary provisions. In order to assess the suitability of Article 322 TFEU as a proper basis, the AG referred to the constant ECJ case-law, which establishes that, in order to verify the correctness of the juridical base for the adoption of a legal act, it is necessary to analyse the finality and the content of it. Following the analysis of its objectives and provisions, the Advocate General rejected Hungary’s and Poland’s perspectives that the Regulation, providing a mechanism to ascertain the violation of rule of law, finds no basis in such Article, that exclusively refers to financial and budgetary laws. Contrarily, the Advocate General supported the Parliament’s and the Council’s interpretation and intentions, according to which the primary objective of the Regulation is to protect the EU budget in specific situations which threaten its proper implementation and constitute breaches of the rule of law. The mentioned breaches of rule of law and the adoptable measures to fix them, according to the text of the Regulation, are just instrumental to the protection of the EU finances. This is deductible from the legal iter that led to a compromise text: while the initial Commission’s proposal put more emphasis on the protection of the rule of law, the Council’s opposition resulting in the final text of Regulation 2020/2092 made it an instrument of financial conditionality, under which ‘the safeguarding of the rule of law operates as a horizontal condition that states must respect when implementing the budget’ (Opinion in C-156/21, par. 135).

Secondly, the applicants claimed that the procedure established by the contested Regulation infringes Article 7 TEU, since it constitutes a ‘parallel procedure’ that it is not allowed pursuant to such Article. At the same time, the procedure established by the Regulation is contrary to the division of competences laid down in Article 4, par. 1, TEU, infringes the principle of conferral laid down in Article 5, par. 2, TEU and the principle of institutional balance laid down in Article 13, par. 2, TEU; moreover, the ‘parallel procedure’ infringes also Article 269 TFEU, which establishes, in the case of Article 7 TEU, limitations to ECJ powers to rule solely on compliance to procedural requirements. As to the breach of Article 7 TEU, the Advocate General argued that such provision does not preclude the use of instruments other than those in that article to guarantee such protection, provided that their essential characteristics differ from those of the protection guaranteed by Article 7 TEU. The Advocate General noted that, in its case-law concerning the European Arrest Warrant and the independence of national courts, the Court of Justice has already drawn the consequences of breaches of values of the European Union without referring to Article 7 TEU. Contrarily, he asserted the compatibility of rules introduced by EU institutions that seek to respond to certain breaches of that value which affect budgetary management with the Treaties.

Moreover, Campos Sánchez-Bordona highlighted several distinguishing aspects between the purpose and procedures of Regulation 2020/2092 and Article 7 TEU. In first place, whereas under Article 7 TEU the adoption of measures is conditional on the existence of a ‘serious and persistent breach’ of the EU values by a Member State, the Regulation refers only to breaches of the principles of the rule of law by a Member State that affect or seriously risk affecting the sound financial management of the Union budget. The Advocate General stressed that the mechanism in the Regulation resembles other financial conditionality and budgetary implementation instruments that exist in various areas of EU law, rather than the mechanism in Article 7 TEU. In second place, the decision-making procedure established by Article 6 of the Regulation differs from that established in Article 7 TEU. Accordingly, it does not infringe the principle of institutional balance, since the conferral of implementing powers to the Council is covered by the concept of implementation of the budget in the broad sense of Article 322, par. 1 (a), TFEU; it does not even violate Article 317 TFEU, which confers on the Commission responsibility for implementation of the budget in a narrow sense. In third place, while the Regulation addresses solely violations of the principle of rule of law, Article 7 TEU refers to breaches of any of the values of the European Union provided by Article 2 TEU. Thus, the premise that the two procedures are equal is groundless. Thus, the limitation of the Court’s jurisdiction under 269 TFEU in relation to Article 7 TEU is not applicable to the Regulation, which contrarily remains subject to the full review of legality provided for in Article 263 TFEU. Accordingly, the Advocate General took the view that the Regulation is compatible with Article 7 TEU.

Thirdly, the two governments appealed to the violation of the principles of legal certainty and legislative clarity. Indeed, the Hungarian government submitted that the concept of the rule of law on which Regulation 2020/2092 is based is partially abstract and, on the other side, it cannot be the subject of a uniform definition in EU law. For that reason, it argued that this definition cannot guide the assessments and measures which may be made or adopted on the basis of the Regulation or of enabling the Member States to identify with the necessary certainty the aspects. Regarding the possibility of giving a uniform definition, the AG considered that, although the concept of the rule of law as a value of EU is a broad one, there is nothing to prevent the EU legislature from defining it more precisely in a specific area of application for the purposes of establishing a financial conditionality mechanism. As to the abstractness of the definition, he recalled the presence of clear specifications of the concept of rule of law in the Regulation. Indeed, the definition enshrined in Article 2 (a) includes several principles that identifies its components, as mentioned above too. Moreover, Article 3 of the Regulation sets out an indicative list of breaches of the principles of the rule of law and Article 4(2) contains an indicative list of areas where breaches of the principles of the rule of law may arise. The breaches of the principles of the rule of law that may give rise to the adoption of the conditionality measures in the Regulation are thereby limited to cases directly linked to implementation of the Union budget. Those lists demonstrate the legislature’s efforts to foster the application of the principles of the rule of law and to increase legal certainty.

Thus, the Advocate General Campos Sánchez-Bordona suggested to dismiss the applications for annulment of Regulation 2020/2092 as an instrument of financial conditionality.

With respect to the October hearings, the AG’s Opinions raised foreseeable considerations, treading the same position taken by the ECJ. Notwithstanding this, its Opinions focus on a noteworthy issue. The AG remarked the substantial difference between the Rule of Law Conditionality Regulation and Article 7 TEU, which also reflects their different nature and objectives. Indeed, scholars commonly claim that the Regulation adds to the limited arsenal of the EU institutions against rule-of-law backsliding, especially next to Article 7 TEU and Article 258 TFEU, as a new safeguard mechanism of protection of EU values. However, the AG’s Opinions, especially concerning the interpretation of the Regulations’ requirements for initiating measures, shed light on the actual limitations of the conditionality law as a new safeguard mechanism of protection in the rule of law crisis. In the eyes of the AG, the Regulation serves not as an additional rule of law sanction mechanism, but rather as a tool for the protection of the budget from the specific threat of rule of law breaches jeopardising the usage of EU funds (Opinion in C-156/21, paras. 138-139). Others argue that limitation can be drawn by the interpretation of rule of law breaches enshrined in the Regulation. Indeed, it possibly fails to address ‘systemic deficiencies’, such as a lack of an independent judiciary or a lack of certain procedural guarantees, which individually might not have a sufficiently direct impact on the Union’s budget, although they certainly jointly affect it. Thus, while the idea of a link between the rule of law and European funds has been commonly conceived as a new alternative to Article 7 TEU to rein in rule of law backsliding Member States, Campos Sánchez-Bordona stressed the real function of the Regulation as finalised at safeguarding the Union’s budget.

Despite its solely indirect reference to the EU value, it is necessary to remark the AG’s Opinions important role during the current rule of law crisis. Awaiting the forthcoming Court’s ruling, it undoubtedly constitutes yet another momentum to stress the EU commitment to protect rule of law, not only as a fundamental value, but also as a possible ‘seed of discord’ for the other EU policies.